DUBLIN (Reuters) - The Irish government's plans to reduce its budget deficit more gradually than planned to fund spending increases is "at the limit of what is prudent", the country's fiscal watchdog said on Wednesday.
Ministers in June scrapped plans to close the budget deficit opened up by one of Europe's strictest COVID-19 lockdown regimes by 2025 primarily to increase capital spending in areas such as housing, where there is a severe undersupply of new homes.
However the Irish Fiscal Advisory Council (IFAC) said running significant budget deficits for several years during a period of strong economic growth carried risks for an economy with one of the highest public debt ratios in Europe.
It also warned that even allowing for low interest rates into the future, there was a one-in-four risk that the government's debt ratio could end up on an unsustainable path.
Ireland's public debt ratio rose to 104.8% of modified gross national income (GNI*) at end-2020 from 94.7% in 2019. The finance ministry forecasts it will stand at 106.3% in 2025 rather than beginning to fall back to pre-pandemic levels.
IFAC urged the government to choose between significantly expanding capital investment, fast increases in current spending and a desire to simultaneously cut taxes, rather than implement all three as is currently planned for next month's budget.
"In terms of permanent measures, budget 2022 plans look to be at the limit of what is prudent," the watchdog said in its pre-budget submission.
"Borrowing to finance investment after the recovery could also lead to inflation and, eventually, overheating. Most notably, supply constraints in construction may lead to rising prices."
Ireland's finance ministry forecasts that the budget deficit will fall to 1.5% of gross domestic product by 2025 or 2.8% of GNI*, viewed by government as a more accurate measure of the size of the economy as it strips out how large multinationals can distort Irish GDP.
While the fiscal council said that better than expected tax receipts indicated that a deficit of closer to 7% of GNI* might be possible this year, the state would still be running a deficit of 1.3% of GNI* by 2025.